With valuations in many markets around the world looking toppy (particularly in the US) and investors arguably complacent about the threat posed by the coronavirus, there’s no shortage of commentators predicting a crash is imminent.
For what it’s worth, I’m also inclined to be more bearish than bullish right now. That said, I’m very aware that trying to predict the direction of markets, at least in the near term, is a waste of time.
What I can say without any hint of sensationalism however, is that a crash is coming. We just don’t know when.
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Regardless of timing, here’s how I’d deal with it.
Be prepared
The best way to deal with a market meltdown is to anticipate it: get your finances in such a state that you know you’ll able to ride out any volatility without losing sleep. “Forewarned is forearmed“, as the saying goes.
Ultimately, this means checking that the way your money is allocated matches your risk-tolerance. Since they often fall the hardest, there’s no point holding just stocks if you panic at the first whiff of trouble.
Stocks should remain the core of your holdings, but a solution would be to increase your exposure to other assets, such as bonds, property, gold and cash. These are unlikely to give you a better result than equities over the very long term, but should help stabilise your portfolio in difficult times.
Tweet less, read more
This isn’t the place for a detailed analysis of the benefits and drawbacks of social media. Notwithstanding this, I do question the usefulness of sites like Twitter and Facebook (and reading highly emotive posts) during market crises.
A solution for making it through a meltdown is to read more about how frequent they actually are. Aside from your regular dose of the Fool UK (naturally!), I’d recommend the writings of US psychologist Daniel Crosby — author of ‘The Laws of Wealth‘ — for this. Clearly, the classic thoughts of Warren Buffett and his teacher, Benjamin Graham, are always worth revising.
Ditch ‘the twitch’
A third recommendation is deleting anything on your phone relating to your investment account(s).
Since we’re long-term investors, compulsively checking your holdings through mobile apps is counterproductive but particularly so when the next crash happens. “A watched pot never boils” can be adapted to “a watched pot never boils but continually fretting over your portfolio can breed unnecessary action and reduced returns“. Not quite as catchy, but you get the gist.
If you’ve done the groundwork to get things in order, you should be able to stay logged off until the storm passes.
Get a watchlist
Having prepared yourself for the worst (and with cash on hand), you can now take steps to profit from a crash as and when it happens. For me, this starts by drawing up a list of stocks I’d want to buy on any share price weakness.
To be clear, buying when everyone is selling sounds easy in theory but is very difficult to do in practice. Faced with financial ‘apocalypse’, it’s remarkably easy to forget that stock markets chug higher over time, despite enduring similar crises in the past.
Should you be able to rise to the challenge, however, you can be confident that the end result will be worth holding your nerve for.
